China’s economic growth: trajectories and evolving institutions

This paper investigates the institutional reason underlying the change in the trajectory of economic growth in post-reform China. It looks at explanations for the change in trajectory of growth in the post-1989 era and also discusses the roles of fiscal autonomy, regional competition and spending bias.

It is argued that the trajectory of growth was much more normal during the period of 1978-89 than in the post-1989 era. In the former period, growth was largely induced by equality-generating institutional change in agriculture and the emergence of the non-state industrial sector. In the latter period, growth was triggered by the acceleration of capital investments under authoritarian decentraliased hierarchy within self-contained regions. Such a growth trajectory accelerates capital deepening, deteriorating total factor productivity and leads to rising regional imbalance. This paper further argues that the change in the trajectory of growth is the outcome of changes in political and inter-governmental fiscal institutions following the 1989 political crisis.

Key concluding points are:

• by any standards, the modifications to political and inter-governmental fiscal institutions were successful because they induced faster growth and achieved political stability -  without them, China might not have maintained the political stability of the last 20 odd years since 1989 
• the nexus between growth and political stability is never linear - triggering economic growth under a decentralised authoritarian system is costly - this system enabled local governments to favour and compete for investment-led growth, but generated negative spillovers such as rapid growth, rising disparity across incomes and regions, environmental degradation, and frequent macro disturbance 
• the resolution of these issues and the transition to inclusive growth necessitate open access to further institutional reforms at both economic and political levels - issues such as building good governance, sound financial and fiscal systems, effective identification and protection for civil and private property rights cannot be ignored in the reform agenda of the future.